Capital Budgeting
Topics: Net present value, Internal rate of return, Rate of return / Pages: 5 (1147 words) / Published: Jan 9th, 2013

Capital Budgeting

Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.
1a) If the discount rate is 0%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 0% -$400,000
1 $100,000 0% $100,000
2 $120,000 0% $120,000
3 $850,000 0% $850,000
Answer: The projects net present value is $670,000
If the discount rate is 2%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 2% -$400,000
1 $100,000 2% $98,039
2 $120,000 2% $115,340
3 $850,000 2% $800,974
Answer: The projects net present value is $614,353.45
If the discount rate is 6%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 6% -$400,000
1 $100,000 6% $94,340
2 $120,000 6% $106,800
3 $850,000 6% $713,676
Answer: The projects net present value is $514,815.59
If the discount rate is 11%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 11% -$400,000
1 $100,000 11% $90,090
2 $120,000 11% $97,395
3 $850,000 11% $621,513
Answer: The projects net present value is $408,997.46
With a cost of Capital of 5%, what is this project 's modified internal rate of return (MIRR)?
The formula is: MIRR = (-FV/PV)1/n-1-1
Answer: For this project, the projected MIRR is 42.72%
My next task was to build a graph and explain what is showed.
Answer: The graph showed the net present value decreased as the discount rate increased. The net present value crosses the horizontal line at approximately 42%, just before the Modified internal rate of return of 42.72%.
1b) What is the projects internal rate of return?
Answer: IRR = 4.4184%
If the discount



References: Anthes, G. (2003, February 17). Internal rate of return. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78524/ROI_Guide_Internal_Rate_of_Return Anthes, G. (2003, February 17). Net present value. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78530/ROI_Guide_Net_Present_Value

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